Will a global fund add value to your portfolio?

Mutual funds offer investors the opportunity to participate in the growth of some of the country's largest and most profitable companies. There is no dearth of choice here since hundreds of domestic equity funds promise exactly this. A handful of these deliver on this promise on a consistent basis.

However, at times, even the best of the lot gets weighed down. The Indian economy has been facing some problems and the recent performance of domestic equity funds mirrors this. However, not all funds are suffering. Many international funds seem to be doing well in an otherwise despondent market (see Impressive returns).

For instance, Motilal Oswal MOSt Shares Nasdaq-100 ETF has delivered returns of 45% in the past one year. There are a few global funds being offered in the country, with Motilal Oswal joining the fray just over a year ago, while Franklin Templeton Investments launched a fund a few months ago. ICICI Prudential Mutual Fund is the latest asset management company to launch a product in this segment and more such funds could be launched in the coming months.

Does this imply that the investors who are disappointed with the local market should add a global fund in their portfolio? Let's find out.

It's all about diversification

For most of us, investing beyond the border is an alien concept. We have a domestic bias in our investments, and for good reason. Being a growing economy with a powerful domestic consumption engine, we are spoilt in terms of expected returns from our investments.

A double-digit growth rate in the earnings of corporate India means that shares in these companies are also expected to clock at least a double-digit rise in prices.

Since growth requires funds, deposits with banks and companies are also rewarded with high rates of interest. There is hardly any other country that provides such opportunities for investors. This is why firm believers in the domestic growth story may not want to invest abroad.

However, this strategy is not so much about the returns that your domestic investments are earning, nor is it about seeking higher returns elsewhere.

The sole purpose of venturing abroad is to bring an element of diversification to your existing portfolio. Your Indian assets may not always be able to fulfil your return requirements, for there will be periods when these do not fetch good returns.

The Indian markets may even go through extended periods of flat returns. So, it's a good idea to have some investments that bear little correlation to the domestic market. Vivek Rege, managing director, VR Wealth Advisors, says, "You don't want to be in a situation where all your assets behave in the same manner.

It makes sense to diversify through an international fund." Dhirendra Kumar, CEO, Value Research, says, "Diversification is a good reason for venturing abroad. There is always a case for having an international fund even when the foreign market is not doing well."

Besides diversification, another benefit that these funds offer investors is access to unique investment opportunities that are not available in India. Every country or region enjoys certain strengths unique to its geography, which may not be available elsewhere.

While the Indian economy derives strength from several quarters, there are some areas where it falls short, such as technology, agriculture, commodities and defence. Investors can tap these opportunities available in a foreign market.

For instance, a US-focused fund will make for a compelling argument about the opportunities offered by the innovation fuelled US economy, comprising companies with global brands that enjoy patronage from worldwide consumers.

Watch out for

Global funds, much like their counterparts that are focused on domestic space, carry the usual risks related to the market, business, etc.

However, there are additional dangers, the first being the risk of the unknown. While we are aware of the dynamics in play in our own economy and can, therefore, take slightly more informed judgements with local investments, this is not possible with foreign investments.

Other economies operate in different dynamics. There is a variety of factors, such as geopolitical and socio-economic, that is unique to each country or region that can influence their performance. It is important that investors get a hang of such regional issues before investing abroad. Kumar cautions investors against putting money in exotic global funds that are narrowly defined in terms of their exposure.

"Some international funds might seem very interesting in concept, but will not offer genuine diversification to the investor," he adds. International funds also carry a currency risk. Though your investment is in rupee terms, you have exposure to foreign currency assets (the rupee is first converted into dollar and then into the local currency for investing abroad). This means that your investment value will fluctuate according to the changes in the respective exchange rate.